If you like investing in turnaround plays, Aurora Cannabis (ACB 2.09%) is a stock you should probably know about. The Canadian marijuana company is in the process of finding a way to finally overcome the severe turmoil it has faced in recent years, and if management’s forecasts prove correct, it could even see its value increase Stocks are coming.
But at the end of the day, it’s still a risky pot stock that’s just starting to find its footing, and there are still a few potential pitfalls ahead. Here’s what you need to know about whether or not you should buy the stock.
Is this the beginning of the turning point?
Aurora shareholders have had a (very) difficult few years. The company’s shares are down 96% compared to three years ago, and quarterly sales are down 9% over the same period, giving the company sales of about 63 million Canadian dollars. This is due to several factors, starting with the now-abandoned strategy of leaving no customers behind, which saw the company significantly expand its cannabis production capacity and retail presence in order to capture as much of the Canadian marijuana market as possible.
At the time, the Canadian cannabis market was booming, with a gram of legal marijuana selling for around $6 CAD. But as more growing capacity came online between Aurora and its competitors, there ended up being more product on the market than there was demand. As a result, prices collapsed and many companies lost their margins. Aurora and its competitors were therefore forced to severely limit their business activities. Now, as the first shoots of recovery in the Canadian market become visible, the price of a gram of cannabis is closer to $5 CAD. An improving price level could therefore support the recovery of margins and thus potentially create synergies with a turnaround through newly more efficient processes. It is also making some progress in European markets such as Germany, France, Poland and the UK, which could lead to faster sales growth.
CEO Miguel Martin believes the company will reach positive free cash flow (FCF) sometime in 2024 thanks to years of cutting and trimming expenses. That seems much more possible now than it did just a few years ago; his cost-cutting transformation plan was well underway. In the fiscal second quarter, which corresponds to the quarter that ended at the end of September, the company reported positive operating income of C$2 million for the first time since early 2016. Still, the company lost C$35 million in cash during the quarter.
At its current spending pace, the company can safely sustain this cash burn for some time. The company still has $129 million in cash, equivalents and short-term investments and completed a stock offering on October 3 to raise gross proceeds of C$39 million. Management does not assume that stock offerings will have to be offered at market price in the medium term. So if you decide to invest, you can be reasonably confident that your shares won’t be diluted immediately. And if the company can continue to generate positive operating income while completing the work of reducing its overhead costs, true profitability could be a few quarters away. At that point, the stock’s valuation metrics would likely rise, and further earnings growth could begin to push shares higher.
There is an opportunity, but it is risky
Now is a better time to buy Aurora Cannabis stock than it has been in the last few years. The combination of still-emerging operational efficiencies and the potential for rising cannabis prices could ensure a steady comeback. It’s possible that its shares will eventually rise once the market notices the progress the company has made.
However, if you don’t want to take risks, this stock is not for you. Although the company’s turnaround seems likely at the moment, it can in no way be guaranteed.
Although the company owns a number of different cannabis brands in different market segments, it has not yet been able to demonstrate a competitive advantage that would allow it to maintain its market share. Therefore, the company will be forced to spend significant amounts on marketing to gain a foothold in crowded large markets such as Canada. Additionally, the Company is unable to take advantage of the legalization of cannabis in the United States, if it occurs at all. In other words, its competitors may soon be able to grow rapidly outside of Canada while slowing Aurora’s growth domestically.
So is this stock a buy now? Not for most investors, but for those who are very risk tolerant and who like the idea of investing in a reversal, it might be a good time to think about opening a position.
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.